10 rules of successful trading

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Unlike investors who need markets to move up in order to profit from their investment, traders don't depend only on bull markets. They can profit even in down trends.



This is a crucial advantage traders enjoy over investors -- the ability to make money whether the market is moving up or down. This fact should not, however, lead you to believe that trading is easy; it requires both a s****-set and rigorous discipline.


Many people take to trading in the mistaken belief that it is the simplest way of making money. Far from it, I believe it is the easiest way of losing money. There is an old Wall Street adage, that 'the easiest way of making a small fortune in the markets is having a large fortune'.


This game is by no means for the faint hearted. And, this battle is not won or lost during trading hours but before the markets open but through a disciplined approach to trading.

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1. Always have a trading plan
Winning traders diligently maintain charts and keep aside some hours for market analysis. Every evening a winning trader updates his notebook and writes his strategy for the next day. Winning traders have a sense of the market's main trend. They identify the strongest sectors of the market and then the strongest stocks in those sectors. They know the level they are going to enter at and approximate targets for the anticipated move.
For example, I am willing to hold till the market is acting right. Once the market is unable to hold certain levels and breaks crucial supports, I book profits. Again, this depends on the type of market I am dealing with.
In a strong up trend, I want the market to throw me out of a profitable trade.
In a mild up trend, I am a little more cautious and try to book profits at the first sign of weakness.
In a choppy market, not only do I trade the lightest, I book profits while the market is still moving in my direction.
Good technical traders do not worry or debate about the news flow; they go by what the market is doing.

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2. Avoid overtrading

Overtrading is the single biggest malaise of most traders. A disciplined trader is always ready to trade light when the market turns choppy and even not trade if there are no trades on the horizon.



For example, I trade full steam only when I see a trending market and reduce my trading stakes when I am not confident of the expected move. I reduce my trade even more if the market is stuck in a choppy mode with very small swings.



A disciplined trader knows when to build positions and step on the gas and when to trade light and he can only make this assessment after he is clear about his analysis of the market and has a trading plan at the beginning of every trading day.

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3. Don't get unnerved by losses

A winning trader is always cautious; he knows each trade is just another trade, so he always uses money management techniques. He never over leverages and always has set-ups and rules which he follows religiously.



He takes losses in his stride and tries to understand why the market moved against him. Often you get important trading lessons from your losses.

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4. Try to capture the large market moves

Novice traders often book profits too quickly because they want to enjoy the winning feeling. Sometimes even on the media one hears things like, "You never lose your shirt booking profits." I believe novice traders actually lose their account equity quickly because they do not book their losses quickly enough.


Knowledgeable traders on the other hand, will also lose their trading equity -- though slowly -- if they are satisfied in booking small profits all the time. By doing that the only person who can grow rich is your broker. And this does happen because, inevitably, you will have periods of drawdowns when you are not in sync with the market. You can never cover a 15-20% drawdown if you keep booking small profits. The best you will do is be at breakeven at the end of the day, which is not the goal of successful trading.


A trading account that is not growing is not sustainable. Thus when you believe you have entered into a large move, you need to ride it out till the market stops acting right. Traders with a lot of knowledge of technical analysis, but little experience, often get into the quagmire of following very small targets, believing the market to be overbought at every small rise -- and uniformly so in all markets.
Such traders are unable to make money because they are too smart for their own good. They forget to see the phase of the market. Not only do these traders book profits early, sometimes they even take short positions believing that a correction is "due". Markets do not generally correct when corrections are "due".
The best policy is to use a trailing stop loss and let the market run when it wants to run. The disciplined trader understands this and keeps stop losses wide enough so that he is balanced between staying in the move as well as protecting his equity. Capturing a few large moves every year is what really makes worthwhile trading profits